Understanding Divestment

Many campaigns call for divestment. But few understand what it means.This site provides an easy overview to help activists understand divestment in a financial sense and shape their demands.

The basics

What does divestment actually mean?

Big organisations like universities and pension funds invest in many different types of financial 'asset'. This includes stocks and shares (ie companies listed on the stock market); government debt; corporate debt; and directly in companies in return for an ownership stake.When an investor buys corporate debt, or provides capital via a private market or venture capital investment, they are usually giving money to the company directly. This often enables the company to expand their activities as they have more money available to spend.When an investor buys a share in a company, they usually buy from another investor on the secondary market. A share is a bit like a second hand good: once it has been bought from the company, investors buy and sell shares between eachother.When people call for divestment, they tend to mean stocks and shares. However, this matters because the type of asset will have an impact on the way the company responds. Read more below.

The implications

What happens when an organisation divests?

When people call for divestment, they tend to mean stocks and shares. However, the impact differs across types of investments.When you divest from stocks and shares, it does not always affect the financing for the company at all. This is because, as discussed above, a share is a bit like a second hand good: the company does not receive any more or less money as a result.If a lot of shares were sold in a short period of time (for example, when stock prices dive in relation to a particular controversy), it can affect the stock price. However, if an organisation is divesting in isolation, it is unlikely to have a significant impact. This is because when an organisation divests it sells its holdings to another organisation - so for every seller, there is a buyer.When an organisation divests from primary financing, such as corporate bonds and private equity investments, or in the case of banks providing direct loans, it may more directly affect the company's finances. This is because the company may face higher interest rates and so reduce the money available to them.In both cases, divestment can be embarrassing for the company in question: it shows a lack of confidence in the company's strategy and in the leadership of the company directors. However, to embarrass the company, divestment should be done loudly and publicly.

01

Divestment can embarrass companies, reinforce moral stigma and open the space for government to act

02

Divestment of primary finance (such as corporate bonds) can affect borrowing costs for firms

03

If enough investors divest secondary capital it may affect the company's finances - but only under some circumstances

The evidence

What do we know about the impact of divestment?

Divestment campaigns usually aim at two purposes: (1) to cut off financing for a bad thing; and (2) to drive moral stigma.The evidence base for divestment varies according to the topic.There is some evidence showing that divestment campaigns have had an impact on stock prices, however there is not much evidence to show whether this resulted in change by the companies or targets in question. This doesn't mean that it doesn't work; only that no-one has fully investigated this question.While studies have looked at the impact on stock prices, very little research has been done into divestment of primary capital, possibly because this is not commonly a specific target of activist campaigns.The most well-studied divestment campaign is that of the boycott of apartheid South Africa, in which pressure was placed on financial institutions to cut ties. Studies suggest that South African companies experienced little change in stock price over this period. However, restrictions to bank loans and government financing affected the cost of borrowing for the government.There is also evidence that a public divestment announcement can have an impact on stock prices, even if this is not sustained: In this case, it was the public announcement, not the selling of shares, that affected stock prices because it signalled to other investors a lack of confidence in the company. This reinforces the idea that divestment needs to be loud to have the most impact.

The options

What does this mean for activists?

There is no one way, and it will be dependent on the particular campaign.But in general there are two theories of change for divestment campaigns: (i) to reinforce moral stigma by calling for full divestment; or (ii) to divest primary capital such as bonds, while holding secondary capital such as shares and using them to pressure the company/target to change.

The moral case

Use divestment to reinforce moral stigma

Activists can call for full divestment of investments to reinforce moral stigma and enable wider political space for government to act.In these cases, investors should reinforce this by divesting publicly if possible; and using their voice to advocate for policy change.if this can be done in a coordinated manner (insofar as antitrust law allows), it may reinforce the communication value - and so financial impact - of the move.

Financial pressure

Use the threat of divestment to pressure companies

Activists could call for divestment of any new capital (for example, by halting the purchase of any new debt or venture capital funding), while pushing for organisations to use their existing access as investors to pressure companies to act.This includes using their rights as shareholders to vote against directors and pay packets at target companies, voting 'for' shareholder resolutions that call for environmental or social change, and using public statements to pressure the company or target. This could be done with a threat of future divestment (including both shedding of shares, and refusal to refinance new debt) if demands are not met.

Any questions?

Get in touch

The Capital Shift Project exists to help activist groups understand the finance sector better. If you're an activist group with questions about divestment, please get in touch.